Asset Based Lending 101: Pros and Cons Analysis

Asset Based Lending 101: Pros and Cons Analysis

Sometimes companies experience cash flow emergencies, or unexpected growth opportunities open up. Under these circumstances, asset-based lending is an option that provides business financing to help you through adverse situations or take advantage of sudden openings in the market. Here are some considerations to be aware of while deciding whether asset-based lending is the right solution for your business.

Basics of Asset Based Lending

Asset-based lending is a form of financing that provides loans or lines of credit using the assets your business owns as collateral. These may include accounts receivables, equipment, and inventory. Sometimes the collateral is comprised of only one type of asset, while other times it may consist of multiple assets. You are not selling the assets, but rather borrowing against them.

Benefits of Asset Based Lending

If you have a large number of fixed assets, you can use them to obtain needed funding for your business. Asset-based financing is easier to qualify for than traditional loans and lines of credit. Asset-based lending is also less expensive than other alternative financing methods. Additionally, you have a great deal of flexibility in how you use the funds to benefit your business. As your company acquires more assets, the amount of funding available to your business increases.

Downsides to Asset Based Lending

To be suitable for use as collateral, assets must be valuable and convert easily into cash, so you may not be able to use all your assets to help with your financing. You also run the risk of losing your assets if your company is unable to repay the loan. Although asset-based financing costs less than other forms of alternative financing, it is more expensive than loans from traditional financial institutions. These are things to keep in mind when deciding whether asset-based lending is the best alternative for your company.